Uranium Deal at 40% Premium Shows Nuclear Future After Fukushima: Real M&A

Less than six months after the worst atomic disaster since Chernobyl, Cameco Corp. (CCO)’s gambit to buy a Canadian uranium deposit in its biggest ever acquisition is showing that the nuclear future is now.

Cameco, the largest uranium producer, took its $530 million bid for Hathor Exploration Ltd. (HAT) to shareholders last week after negotiations failed to lead to an agreement. The industry’s biggest takeover since the partial meltdown of a Japanese power plant in March was set at a 40 percent premium even as the price of uranium fell below levels reached in the aftermath of the disaster. Hathor, which surged above the C$3.75 bid, said it is also in talks with other potential buyers.

While Cameco has plummeted almost 40 percent since reactors at the Fukushima Dai-Ichi plant leaked radiation after being hit by an earthquake and tsunami, the Saskatoon, Saskatchewan-based mining company is betting uranium prices will rebound as developing nations from China to India try to meet energy demands in the world’s fastest-growing economies. The hostile bid may also reignite interest in acquisitions of uranium miners, which have lost half their value since the crisis, according to Sterne Agee & Leach Inc. and Rivanna Capital LLC.

“This transaction indicates a dose of rationality on the future of nuclear,” Ben-Ari Elias, a New York-based analyst at Sterne Agee, said in a telephone interview. “People had gotten distracted trying to figure out what the needs would be after the earthquake and crisis in Japan. There was a lot of panic. As that fear subsides, you could potentially see more deals.”

Valuation Gap

Before announcing its C$520 million ($530 million) bid, Cameco said it delivered a written proposal to Vancouver-based Hathor on Aug. 19. Cameco took the offer directly to Hathor’s shareholders after the companies couldn’t agree on a price, according to Cameco’s Chief Executive Officer Timothy Gitzel.

“The bottom line was we just couldn’t see each other’s goal posts with respect to valuation,” he said on a conference call on Aug. 26.

Cameco spokesman Murray Lyons declined to comment further.

Directors of Hathor said in a statement last week that shareholders shouldn’t tender their stock to Cameco until the company has had “sufficient time to respond.”

The tender offer, which began last week and expires on Oct. 31, gives Hathor’s owners C$3.75 in cash for each share held. Hathor closed at C$4.12 last week, or 9.9 percent above the bid, according to data compiled by Bloomberg.

Relative Value

“We definitely feel that the valuation put forth by Cameco is low and obviously the market feels it’s low as well,” Tony Nunziata, a spokesman for Hathor, said in a telephone interview Sept. 2. “We do have other players we’re talking to who are seriously looking at the company. We’ll see if one of them steps up to the plate or if Cameco bumps its offer.”

If successful, Hathor will be Cameco’s largest takeover and the first of a publicly traded company, the data show.

It was also the first announced offer by Gitzel since he took over Cameco in July. Gitzel said he would start looking at acquisitions after Japan’s nuclear disaster push down prices of uranium producers, according to an interview with the Globe and Mail published in late June.

The magnitude-9 temblor and subsequent tsunami that struck on March 11 knocked out power and disabled back-up generators at Tokyo Electric Power Co.’s Fukushima plant, leading to explosions and radiation leaks as cooling water boiled away.

While Japan was hit by rolling blackouts, then-Prime Minister Naoto Kan called for the nation to end its reliance on atomic energy and imposed the first mandatory power savings since the 1970s. Nuclear energy provided about 30 percent of Japan’s electricity before the crisis.

Uranium Prices

The disaster caused uranium to plunge 27 percent in three days to $49.99 per pound of U3O8, its tradable form. While prices rebounded to $61.27 by March 24, the metal has since dropped further, falling to a low of $48.75 on Aug. 30.

The Global X Uranium ETF (URA) has tumbled 45 percent since March 11, data compiled by Bloomberg show. That’s left the median company in the exchange-traded fund valued at 1.25 times net assets, down from 2.75 times on March 11, the data show.

Gitzel is using acquisitions to help Cameco double its uranium production to 40 million pounds by 2018 after the stock lost more than 60 percent since its record high four years ago.

Hathor’s Roughrider deposit in the Athabasca Basin, a mining region in northern Saskatchewan, has so-called indicated uranium resources of about 17.2 million pounds and is about 25 kilometers (16 miles) northwest of Cameco’s Rabbit Lake mill, Cameco said in the Aug. 26 statement.

Roughrider Deposit

“It’s in their backyard,” John Kinsey, a Toronto-based fund manager for Caldwell Securities Ltd., which invests in Cameco as part of its C$1 billion in assets, said in a telephone interview. “They know the Athabasca region very well. This could be insurance for Cameco to make sure they don’t disappoint and do indeed reach that target.”

Cameco’s mill in the area is only running at about half of its capacity, Kinsey said.

Developing nations such as China, India and Russia are turning to nuclear power to meet their power needs, boosting demand for uranium. About 180 million pounds of uranium ore was used last year, outstripping production by 40 million pounds, according to Sterne Agee’s Elias.

China has 14 nuclear reactors, 26 under construction and 52 more planned, according to the World Nuclear Association’s website. India has six under construction and 17 planned, while Russia has 10 being built and 14 more in the lineup.

Nuclear Push

Those nations are “the big players that are going to drive the next wave of demand for nuclear energy and uranium,” Ben Mackovak, a senior analyst at Charlottesville, Virginia-based hedge fund Rivanna Capital, said in a telephone interview.

Renewed support for nuclear power in Japan may also bolster uranium prices. Yoshihiko Noda, who replaced Kan as the nation’s prime minister on Aug. 30, said in a policy statement that Japan will “guarantee the stable supply of power by utilizing nuclear plants after confirming their safety.”

“It was a terrible disaster, but nuclear power still needs to be part of the solution,” Mackovak said. The renewed interest in acquisitions “shows that the future for nuclear is there. It was never derailed. There was just the perception that it was derailed because there was a lot of panic and fear in the markets,” he said.

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.

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